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TRANSPORTCEO - 06/03/2018
What is HMM thinking?

Korean carrier Hyundai Merchant Marine’s expansion plans are incompatible with market stability. Will it settle for more limited ambitions?

South Korean carrier Hyundai Merchant Marine (HMM) is back in the news with an impending order for as many as 14 Ultra Large Container Vessels (ULCV) of 22,000 teu and for its intriguing re-entrance into the Asia-Europe market as a vessel provider, with reports suggesting a new standalone service called Asia Europe Express (AEX) using 10 Classic Panamax ships of 4,700 teu will commence in April. The AEX ships would be the smallest deployed on the route that is usually reserved for ULCVs, with faster transit times to Europe (Alphaliner indicated calls at Rotterdam, Hamburg and Felixstowe) being used as the carrot to shippers.

The two developments appear to be connected. HMM has two years left to run on a slot-charter agreement signed in 2016 with 2M carriers Maersk Line and MSC and presumably sees the new ships either as a bargaining chip to continue that partnership as it will have more to bring to the table, or to leverage full membership of another carrier group, or in the worst case scenario to have sufficient means to operate independently, building on the custom generated by the AEX service.

Table 1: HMM containership fleet, 22 February 2018

Source: Drewry Maritime Research

More importantly, is this new order the sum of HMM’s ambitions or does it signal the start of a previously expressed expansion game plan? The answer to that will decide the company’s hard-to-predict future.
In the midst of a shareholder-mandated restructure in late 2016 the company announced a bold vision to control 5% of the world fleet by 2021. That target was made more difficult when it was forced to relinquish a number of charter vessels to Maersk and MSC as a condition for sharing space with them, with the 2M carriers needing to appease customers fearful of a repeat of the situation when cargoes booked with Hanjin Shipping’s service partners were left stranded when that Korean line went bankrupt.
If HMM still maintains that vision the first batch of new ULCVs will just be the start. From its current position - operating approximately 1.5% of the world fleet – it will need a total of 1.2 million teu based on today’s active fleet and orderbook (see Table 2) to reach its target. To do so will require an additional 830,000 teu (or 38 x 22,000 teu ULCVs); more than twice what it currently has on the seas.

Table 2: Fully cellular containership fleet, 22 February 2018

Note: Includes as of yet unsigned Yang Ming order for 10 x 11,000 teu + 10 x 2,800 teu units. ?Source: Drewry Maritime Research

Frankly, that seems like a pipe dream. Firstly, the company lacks the financial resources – despite improving the debt ratio it just reported a net loss of KRW 1.2 trillion ($1.1 billion) for 2017 – and will be dependent on funds from the state-owned Korea Maritime Corp to even secure the first order. There is a high likelihood the company will benefit from further government support as part of a wider policy to support the flagging shipbuilding industry, but not to the extent that would propel HMM into the big leagues.
Secondly, and most importantly in our view, to follow such a rapid expansion plan would be ruinous for the container industry, inevitably leading to a vicious bout of rate discounting that would deepen HMM’s losses and once again raise fears of a collapse . Such a scenario is incompatible with what should be HMM’s primary objective; to restore trust and confidence in its brand. Its reputation took a hit when Hanjin failed, when many realised it could just have easily been HMM instead but for the whim of the Korean government.
Confidence in the market has improved significantly since Hanjin’s demise, so much so that the logistics firm Kuehne + Nagel has cancelled its carrier bankruptcy insurance policy, but another prolonged run of liner deficits would send shivers down the backs of shippers and freight forwarders once again. For its part, HMM has managed to grow its business quickly as annual volumes increased by 30% in 2017, helped by the pick-up of former Hanjin customers. At the time of writing Drewry hadn’t seen a breakdown of the company’s full-year volumes by trade, but after nine months of 2017 the two main growth markets were Intra-Asia (up 81%) and the Transpacific (36%). The focus on the Intra-Asia trade, where freight rates are notoriously low, saw HMM’s worldwide unit revenues fall by 9% when all other major carriers were seeing gains.

Source: Drewry Maritime Research

Source: HMM

Source: HMM

HMM appears to have been given the benefit of the doubt by Korean manufacturers, who were possibly emotionally motivated by nationalistic loyalty when transferring cargoes from Hanjin to HMM. They helped HMM’s quarterly volume growth soar to 30-40% between 4Q16-3Q17 (see Figure 2), but with comparisons becoming like-for-like in 4Q17 the growth rate slipped to 7%, giving a truer impression of the organic growth and rising trust in the company.
The company has done a good job of stabilising itself since the turmoil of late 2016, but much like Korea itself, it finds itself at the cross roads, not knowing whether to stick or twist to remain a shipping superpower. In our opinion, HMM needs to shed any grand ambitions it has and realise the competition has moved too far ahead for it to catch-up. To vainly try would be to risk everything. The proposed new order on its own is not evidence that it is being reckless, but it might be a wise move to signal what the long-term plan is. It has two years to secure itself a home with a carrier alliance and existing members would likely be wary of inviting a potentially destabilising and financially risky line into the fold. Moreover, growing too big would very likely preclude it from becoming a full member of the 2M, given that group is already close to permitted capacity thresholds allowed by competition authorities.

Note: Yang Ming orders not yet signed?. Source: Drewry Maritime Research

Even before any confirmation of the HMM newbuild order, the containership orderbook has sparked back to life thanks to deals signed by CMA CGM and MSC late last year and more recently by Evergreen and Yang Ming, the latter only at the board approval stage (see Table 3). Assuming the Yang Ming orders go through, new orders placed in the first two months of this year are already over 50% of what was booked in the entirety of 2017 (see Figure 4).

Source: Drewry Maritime Research

Looking at the current fleet and orderbook for the five largest ship classes (see Table 4), there are clues as to who else might want to add to the newbuild tally. CMA CGM has an obvious numerical disadvantage in the ULCV class in relation to it nearest competitors, especially as we know that Cosco is building a $2 billion war chest to fund more of those leviathans. Reactionary moves by the two leading carriers, Maersk and MSC, to maintain their lofty position cannot be discounted.
Hapag-Lloyd and the new Japanese ONE carrier group also have a deficit of ULCVs, but the noises emanating from their respective boardrooms suggest they will look at smaller classes, possibly the VLCV Maxi neo-Panamax class that can sail through the expanded Panama Canal.

Note: Includes as of yet unsigned Yang Ming order for 10 x 11,000 teu + 10 x 2,800 teu units. ?Source: Drewry Maritime Research

Drewry's view

HMM is too far behind the leading pack, which will likely stretch their lead further with more orders, to play catch up without destabilising the market. It should focus its energies on restoring its profitability and reputation, dull as those ambitions may be.




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